I think B and C can work together convincingly. Unless I missed something (always possible) the published account (second edition anyway) merely vaguely relates that Bilbo used sources, both living and written, in Imladris. But to my mind, that much need not mean that Bilbo is delivering "true" history. When he translates Mannish works written in Elvish, actually I feel it makes more sense that he would not substantially alter works of antiquity, even if certain living sources knew better.
The sources are historical, yes, but art as well I would say. And I have a hard time imagining that Glorfindel, for example, would instruct Bilbo to revise a major notion found in the Mannish Silmarillion -- say, that the Sun and Moon hailed from two trees, and Men awoke with the rising of the sun -- simply because he knew that it wasn't really true.
Moreover this wouldn't be necessary I think, as certain specifically Elvish accounts (like
The Awakening of the Quendi, if itself an Elven-child's tale filled with counting lore) could illustrate the Sun existing before the Elves awoke.
Translate those faithfully and let the reader read all, compare and decide.
And it seems an open option to imagine that much of the living aid concerned the languages or difficult texts of a linguistic nature, perhaps the translation of any works by Pengolodh. These too could contain "hints" of "truer" traditions, for comparison to arguably garbled Mannish works.
That's my opinion anyway, although I think I've chatted with WCH, at least, about this before?
Probably
